The Silver Lining of 2020*
By Tyler Cowen, Bloomberg, 12/24/2020
MarketMinder's View: It is hard to seek out silver linings in a year this awful and tragic, but perhaps that is all the more reason to do so as it winds down. In that spirit, this piece shares several developments highlighting humanity's creativity and perseverance during a tragic year. From vaccines and artificial intelligence to transportation and remote work, innovative businesses and individuals have found ways to tackle 2020's challenges, as well as the ones that lie ahead. Now, we aren't suggesting investors buy into companies or sectors solely because of what they did this year—or what they look poised to do in a distant future. But we think this piece provides some helpful high-level perspective: Creative individuals, driven by free markets, find ways to overcome seemingly insurmountable obstacles. We think they will continue to do so, too—reason to be optimistic about the future.
Millions of Americans Receiving Unemployment Aid Could Face Surprise Tax Bill
By Megan Henney, FOXBusiness, 12/24/2020
MarketMinder's View: If you or someone you know received unemployment benefits this year, keep in mind the money counts as taxable income. "A recent survey conducted by Jackson Hewitt Tax Service found that 38% of Americans receiving benefits were unaware that the money was taxable – and nearly two-thirds of those individuals had not set aside or withheld money from the payment for their 2020 income taxes. … The benefits are taxable at the federal level and by most states [that have an income tax] (California, New Jersey, Oregon, Pennsylvania and Virginia are the only ones to completely exempt it), meaning recipients could wind up with a tax bill next year, even though they lost their job. You do not have to pay Social Security and Medicare taxes on your unemployment benefits. The total amount of income you receive and your filing status will determine whether or not you need to file a tax return." Thinking about taxes isn't fun, but being aware today is better than an unpleasant surprise in several months.
Gravity-Defying Market Finds Rationale in Bullish Profit Views
By Elena Popina and Sarah Ponczek, Bloomberg, 12/24/2020
MarketMinder's View: As we prepare to leave 2020 behind, many are excited about 2021's prospects—and this article captures some of that widespread optimism. "Optimism is being fueled by developments that, while occurring largely out of sight, form an increasingly durable bull case for equities, particularly with respect to a corporate recovery in 2021. … Behind the resilience are steadily improving forecasts for 2021 earnings, which analysts have now raised in 10 consecutive weeks. Among S&P 500 companies issuing profit guidance for the fourth quarter, more than half have increased it, the most in at least a decade, data compiled by Bloomberg Intelligence show. Investors are reacting, bidding up virtually any company whose results are poised to hold up." It appears sentiment is catching up to what stocks were seeing when the global bull market began in March: a world where COVID will eventually be old news. We aren't saying optimism is unwarranted today, but stocks move most on the gap between expectations and reality—and that gap appears to be narrowing as we enter 2021. That alone isn't a reason to be bearish, but the state of sentiment is worth watching and calls for vigilance.
Bitcoin's Rally Has Already Outlasted 2017's Epic Run
By Paul Vigna, The Wall Street Journal, 12/24/2020
MarketMinder's View: This piece runs through bitcoin's volatile history, including the cryptocurrency's approach to $20,000 in 2017, plunge in 2018, and eventual return to new highs this year. While this article shares some interesting developments over the past three years, including "initial coin offerings" and increased regulatory scrutiny, bitcoin itself hasn't much changed: It is highly volatile and its future as a medium of exchange still looks hazy. However, many bitcoin proponents believe this time is different: "Bitcoin bulls say the money fueling this year's rally is coming from more reliable sources than past rallies. Since September, big new investors have collectively bought about half a million bitcoins, worth about $11.5 billion, according to analytics firm Chainalysis, which tracked the holdings of investors with at least 1,000 bitcoins in wallets that are less than a year old. … 'This bull run feels very different,' said Pascal Gauthier, chief executive of cryptocurrency-hardware maker Ledger. '2017 was a crazy retail bull run. This time it's serious.'" But to quote legendary investor Sir John Templeton, "The four most dangerous words in investing are, 'This time it's different.'" Though we aren't explicitly against cryptocurrencies, including bitcoin, buying into the hype today smacks of heat chasing. Past price movement tells you nothing about the future—even if that move upward "outlasted" the last one. The idea of buying because something is popular and has gone up recently is a very dangerous rationale, in our view. For more, please see our 12/10/2020 commentary, "A Look at Three Bitcoin Myths."
Things Will Get Worse for the Economy Next Year Before They Get Any Better
MarketMinder's View: After a hyperbolic introduction—comparing the UK economy's 2021 outlook to 1975 Cambodia or 1792 France seems a bit of a stretch—this article paints a dreary picture for the first half of the year. The projection: A mutant strain of COVID-19 will force another broad UK lockdown, knocking growth again, forcing the Bank of England to cut rates to zero (and perhaps even further) and the government to increase COVID relief spending. The piece acknowledges vaccines offer a light at the end of the tunnel, but getting there will be a slog. We share this take not to confirm or dispute the forecast. Nor are we trying to bum anyone out on Christmas Eve. However, this argument—i.e., tough economic sledding until widespread vaccine distribution—is common in the UK and US alike. From an investing perspective, markets digest all widely known information, including forecasts and opinions. It is, therefore, surprises that move markets most. These dour estimates have dominated headlines for months, and we doubt there is much surprise power left. So even if the "worst case" scenario manifests, stocks won't automatically fall—worth keeping in mind if future lockdowns take effect.
States Square off Over Taxing Remote Workers' Income
By Jimmy Vielkind, The Wall Street Journal, 12/23/2020
MarketMinder's View: An issue for many working from home in a state different than where they normally conduct business: Where should your state income taxes go? As this article describes, that question will go to the Supreme Court. "More than a dozen states submitted legal briefs this week to weigh in on a petition that New Hampshire filed with the court in October to stop Massachusetts from taxing residents working remotely. The petition says Massachusetts doesn't have the right to tax the income of New Hampshire residents who previously commuted to their jobs in Massachusetts but now work from home. ... A ruling would have significant budget implications for states that have lost billions of dollars in tax revenue during the pandemic and could set a precedent on taxing remote workers that endures past the coronavirus crisis." Like with all policy matters, we have no preference on the outcome and care more about the potential economic impact. We won't hazard a guess as to how this will play out—or the impact on states' budgets—but as a personal finance matter, those impacted should follow this news and consult your tax professional.
US Household Spending Drops for First Time in 7 Months
By Staff, Dow Jones, 12/23/2020
MarketMinder's View: Though this article leads with November personal consumption expenditures (PCE)—a broad consumer spending gauge—it also rounds up other recently released economic data, including weekly jobless claims and monthly durable goods orders. The data themselves were a mixed bag. November PCE fell -0.4% m/m, driven by declines in both goods and services spending—and particularly in food services and accommodations. However, durable goods orders rose 0.9% m/m, and, "The rise in part reflected increasing business investment—companies, taking advantage of low interest rates, are buying equipment and software." The majority of the article explores these figures' near-future economic implications, but we suggest investors refrain from reading too much into one month (or week, in terms of jobless claims) of data. In our view, they show COVID-related restrictions weigh on economic activity—not exactly a novel takeaway. More interesting, in our view, is the reaction to the data. While most experts seem pessimistic about the US economy's prospects (at least in the near term), "Some economists think gross domestic product could grow by a robust 5% or more next year." That latter tidbit points to rising optimism—a development worth monitoring in the coming months.
Three Reasons 2021 Could Be (a Lot) Better Than You Think
MarketMinder's View: The reasons for the titular statement: An effective vaccine will allow the economy to reopen, unleashing pent-up demand; policymaker aid will juice a recovery; and, relatedly, that aid has propped up businesses and jobs that would have otherwise been lost due to the COVID-driven recession. We agree the easing of COVID restrictions—whether due to a vaccine or otherwise—will allow businesses and households to return to normal, boosting growth. We have already seen that once, following the spring's lockdown. However, this piece gives too much credit to Congress and the Fed's role in the recovery. Sure, the Fed's alphabet soup of programs likely aided in some ways, like temporarily boosting confidence in the corporate bond market. Similarly, Congress's huge relief packages gave a lifeline to those directly affected by COVID fallout. But cushions aren't rocket fuel for the economy. The biggest boost will come from economic reopenings, in our view—and when that will happen remains unknown, as COVID restrictions are political decisions. All in all, the optimism here is fine but attributing it so heavily to policymakers' "support" illustrates lingering skepticism.
When Money Is Free, Lenders Start Charging for Everything Else
By Charlie Devereux, Charlie Wells and Stefania Spezzati, Bloomberg, 12/23/2020
MarketMinder's View: Please note MarketMinder doesn't make individual security recommendations. Companies highlighted here serve only to illustrate the unintended downsides of the ECB's negative interest rate policy, which some consider stimulus. As this details, "Introducing charges and increasing fees show how a future of sub-zero interest rates is forcing euro-area banks to transfer more costs to clients. ... While Asian and American banks cans still count on positive rates, Europe's half-a-decade experiment with negative interest rates has put pressure on lending revenue and burdened banks with billions of euros in penalties for parking cash with the central bank. In Denmark, where benchmark rates have been negative since 2012, most banks now charge clients on deposits exceeding a set amount." The article goes on to document many other examples across countries and regions with negative interest rates, which highlights a key point, in our view: Central banks enacted these policies on the expectation banks would lend excess funds rather than hold onto them. Instead, they passed the costs along, responding to incentives in a way officials didn't predict. It is yet another reason why countries including Denmark, Sweden and Japan (as well as the eurozone) have little to show for their negative interest rate policies—evidence of their ineffectiveness, in our view. For more, see our 5/15/2020 commentary, "Much Ado About Negative Rates."
Silicon Valley Wins as SEC Allows Direct IPOs to Raise Cash
By Ben Bain and Crystal Tse, Bloomberg, 12/23/2020
MarketMinder's View: "The Securities and Exchange Commission announced Tuesday that it had approved an NYSE Group Inc. plan for so-called primary direct listings. The change marks a major departure from traditional IPOs, in which companies rely on investment banks to guide their share sales and stock is allocated to institutional investors the night before it starts trading. Instead, companies will now be able to sell shares directly on the exchange to raise capital -- something that's not been previously been allowed." Direct listings aren't a brand-new idea—as the piece notes, businesses may directly list existing shares to allow investors or management to cash out—but the SEC's approval paves the way for companies to sell new shares to raise money. As market participants debate the pros and cons, we think the development speaks to firms' longer-running issues with raising capital. The traditional IPO process is long and expensive—prompting many firms to raise funding from private investors. Perhaps the NYSE's plan encourages firms to return to public markets. Though some investors fret poorly run or fraudulent companies now have easier access to markets without investment banks acting as a gatekeeper, we think this concern is a tad overstated. The market efficiently discounts all widely known information, and if a business isn't sound, the market will reflect that reality.
The Big Risks Wall Street Is Watching for in 2021
By Emily McCormick, Yahoo! Finance, 12/22/2020
MarketMinder's View: The three risks cited here are problems in vaccine distribution, the Democrats taking both Georgia runoff seats and using uniform control of the presidency and both chambers of Congress to dial up taxes massively and the Fed tapering its asset purchases. Sorry, but we think this is 0-for-3. While vaccine distribution issues could delay the economy's returning to normal, we think stocks are already looking well beyond the immediate rollout of vaccines at this point. On the Georgia runoffs, even if the Democrats take both seats, their "control" of the House is the party's narrowest since 1900—and its Senate edge would be by the slimmest margin possible. That means they would need unanimity on partisan legislation, which isn't likely on something like sweeping tax changes—2017's tax reform was watered down for this very reason, and the GOP had a far larger Congressional edge then. Tapering fears presume asset purchases under quantitative easing are stimulus for stocks, but there isn't any real evidence that is true. Consider: 2013's tapering coincided with the S&P 500 rising 32.4% (per FactSet data). The bull market that ended in February persisted throughout tapering all the way to purchases ceasing and the Fed (very slowly) shrinking its balance sheet. Beyond this, all three suffer a similar problem: These risks are widely watched, sapping surprise power.
Echoes of the Great Recession in Commercial Real Estate
By Marc Joffe, National Review, 12/22/2020
MarketMinder's View: To perhaps steal the article's thunder somewhat, this piece isn't arguing commercial real estate presents a systemic threat to the economy or markets—unlike so many other articles circulating lately. The titular "echoes" are more about the lingering impact of ratings agencies. You see, despite a near-universal consensus that the three "Nationally Recognized Statistical Ratings Agencies" misapplied their highest credit ratings in 2008's crisis—and myriad claims by politicians that they would address the legal and regulatory shortcomings that, in part, drove banks to acquire lots of erroneously highly rated debt—it is crystal clear problems remain. Actually, they may have gotten worse in the coronavirus crisis, considering the Fed used credit ratings, in part, to determine which types of bonds it would target. This piece interestingly documents issues in credit ratings by showing the stark differences between single-borrower commercial mortgage-backed securities (CMBS) and diverse CMBS that pool many different borrowers from across the country. The latter, quite obviously, has far less default risk given the diversity. Yet coming into 2020, many single-borrower CMBS sported top credit ratings, just like their more diverse peers. After COVID hit and single-borrower CMBS tumbled, raters downgraded—another demonstration of their moves following markets rather than leading. For more, see our 12/16/2020 commentary, "Ratings Agencies Meet Realism in 2020."
British Stocks Are Falling in Number – Investors Need to Protect Their Savings
By Jonathan Jones, The Telegraph, 12/22/2020
MarketMinder's View: On both sides of the Atlantic, it seems that many companies have elected to remain private longer than in past decades, perhaps due to increased access to funding that doesn't require them to go public. The result: UK markets had some 400 fewer listed stocks in November 2020 than they did five years earlier. The article argues this drives concentration in huge, old line stocks that dominate the FTSE, like oil or tobacco firms. It presumes this is bad because, "Fund managers and investors often rely on nascent stocks to power their portfolio returns," concluding that British investors must actively seek out small firms or add private equity to their portfolios. There are myriad issues here. For one, the idea that "nascent" firms drive returns is at odds with reality. Tell that to the huge Tech firms that led the last bull market and this one. But above all, this really misses the best solution to the UK's concentration in out-of-favor stocks: Just invest globally. Problem solved.
Commercial Real Estate's Pandemic Pain Is Only Just Beginning
By Noah Buhayar, John Gittelsohn and Jackie Gu, Bloomberg, 12/22/2020
MarketMinder's View: This piece reminds us of "second shoe" arguments from 2009, when virtually everyone presumed commercial real estate would suffer through a wave of vast defaults, triggering a double-dip recession as the consequences hit the banking system. This article argues that the coronavirus has punched retailers, malls, hotels and other big commercial borrowers, but federal aid delayed the pain, which is set to come home to roost in 2021, with state finances and banks about to be hit. We are fairly sure there will be an uptick of some currently unpredictable amount in commercial mortgage defaults over the next year, maybe two, with the scope largely hinging on how long lockdowns interrupt business. But what investors need to appreciate about this is that markets move in anticipation of defaults. This is precisely why stocks and bonds for borrowers in the affected industries were hit far harder in the COVID bear market—and why their recovery is behind other categories. To claim that this is a threat to markets presumes they are unaware hotel occupancy and mall traffic are down, which we find hard to believe.
$900bn Stimulus Is Second Biggest in US History, but It Won't Last Long Enough
By Heather Long, The Washington Post, 12/21/2020
MarketMinder's View: This is a very long look at what is in the new COVID-19 relief bill and who will receive assistance, and it all has one thing in common: It is all financial aid and relief, not stimulus. Stimulus injects federal money into the economy via direct investment that boosts activity as it is spent and re-spent—a phenomenon known as the multiplier effect. Like the money spent and lent through the CARES Act earlier this year, the funds in this new round of aid merely replace lost paychecks and revenues, which is basically a bailout. We aren't using that term negatively—many people, families and businesses will benefit from the sorely needed help. But when assessing the legislation's economic impact, it is important to keep expectations in check. This is a cushion, not recovery rocket fuel. On the bright side for stocks, we aren't seeing anyone argue this massively turbocharges a recovery. Rather, sentiment largely matches the headline here, suggesting expectations aren't running too hot.
A Speculative Frenzy Is Sweeping Wall Street and World Markets
By Staff, Bloomberg, 12/21/2020
MarketMinder's View: Now, we don't think markets are peaking, and we don't think stocks' run thus far is crazy or irrational—so the framing of this piece isn't exactly sensible, in our view. At the same time, animal spirits certainly are stirring, and it is striking just how quickly sentiment has morphed from deep pessimism nine months ago to widespread optimism now. So from that standpoint, we think this article is a great snapshot not just of sentiment today, but of the indicators to watch for further froth as things progress. Again, none of this strikes us a reason to be bearish today, as bull markets can continue even after euphoria arrives, and animal spirits can drive strong returns in a mature bull market. But being vigilant for expectations getting out of hand is important.
Investment Lessons to Remember From a Year to Forget
By Tom Stevenson, The Telegraph, 12/21/2020
MarketMinder's View: This is overall a bit mixed, in our view, but it does have some nuggets of wisdom. One, it captures what it generally feels like to stay invested or put new money to work at the best time to invest: awful. When the market has just fallen a lot, human nature compels you to run away, but the feeling of safety in the moment is a fleeting positive, especially compared to the long-term benefits of compound growth. Two, and more relevant in the here and now, it offers a pithy explanation of how markets work at a bear market low: "Stock markets and economies are not the same thing. Stock markets look to the future, economies operate in real time, while economic data reflects the past. By the time we learned that the second quarter had experienced the worst recorded drop in GDP, the stock market had long moved on to anticipate the expected recovery in 2021. The V-shape of the recovery in markets is what made that March investment such a fleeting opportunity. The bear market was not only one of the fastest ever, it was quite unlike the usual structural or cyclical downturns too. Maybe the lack of economic scarring implied by the rapid rally in prices will turn out to be too optimistic but if widespread vaccinations are achieved next year it will be another striking example of the market's prescience." From there, we think it reads a bit too much into short-term trends, particularly as it relates to investment styles and individual companies. But the parting words are back on target: "This too shall pass. Things are rarely as good as we hope or as bad as we fear. The stock market's determination to look through today's manifold uncertainties to better times ahead is worth hanging onto at the end of a grim year. Here's to a happier 2021." Indeed.
Year-End Portfolio Tweaks for an Unusual Year
MarketMinder's View: In addition to some helpful tax reminders, this is a very, very good reminder to diversify. A handful of stocks soared several hundred or even a couple thousand percent this year, bringing huge smiles to those who owned them the whole way—but likely also creating problems. "When a single winner balloons to 30%, 40% or even 50% of a portfolio, it becomes too much of a good thing in that too much of one's assets may be tied to a single stock. Most investors will have a hard time sleeping well when half of their net worth swings up and down like a crazed chimpanzee. … The simplest solution is to sell a large chunk of the big gainers and rotate the proceeds into [something more diversified]. Recognize what this exchange accomplishes: you are giving up the potential for further gains (of which there is no guarantee) and paying capital gains taxes in exchange for more balance and far less volatility. Those who have difficulty psychologically making the pivot from wealth accumulation to wealth preservation, try thinking about it within the framework of regret minimization. The key is not letting a good problem become a bad one."
New Covid-19 Strain Can't Overturn Bullish Market Narrative Yet
MarketMinder's View: While this puts too much emphasis on vaccines and fiscal responses to the pandemic as market drivers, it makes the very sensible overall point that markets are looking a year or two out, not immediately ahead, and that this is quite normal in a bull market. Some say high price-to-earnings ratios are a sign of irrational exuberance, but as the piece explains, P/Es are high because earnings are depressed due to this year's lockdowns. Once earnings recover, valuations should look less crazy—a fairly normal pattern in a bull market's first couple of years. So the question is, does the new coronavirus strain alter the likelihood of a recovery within that timeframe? "Right now, scientists say that is unlikely. There is no evidence of increased severity of symptoms or higher fatality rates from the new strain, while researchers and public-health officials have expressed confidence that the change in the strain shouldn't affect the efficacy of the vaccines available. As long as science continues to support that consensus belief, the economic outlook one or more years out is unlikely to change much, limiting the extent of the market fallout."
Debate Over Fed's Powers Prove Stumbling Block to Stimulus Talks
By Rachel Siegel, The Washington Post, 12/18/2020
MarketMinder's View: Way back when the Fed first announced its multifaceted COVID-19 response, we observed that several of its lending programs required a rather, well, generous interpretation of its remit. Yes, its job is to serve as lender of last resort during a crisis, but that generally means lender of last resort to banks, a means to maintain liquidity in the financial system—not lender of last resort to the general public. But some of its programs basically turned into lender of last resort for Main Street, which was new. At the time, we surmised that this raised questions about the Fed's mandate and whether politicians would set boundaries for the future. Welp, politicians now seem to be taking up that issue, and it is apparently one sticking point in talks over a second round of fiscal pandemic assistance. Whatever happens with this particular legislation, we wouldn't expect a fast resolution to questions about the Fed—more likely, they kick the can now and revisit this periodically over the next few years, particularly with the next Congress looking set to be one of the most gridlocked in history. In our view, it remains an issue to watch, but as far as market impact goes, the debate probably becomes part of the long-term backdrop.